Foreign Direct Investment and Economic Growth: Evidence from Malaysia

Mohd Shahidan Bin Shaari, Thien Ho Hong, Siti Norwahida Shukeri

Abstract

The objective of this paper is to examine the relationship of foreign direct investment on real gross domestic product in Malaysia using annually data from1971 until 2010. VAR model with cointegration technique is applied to examine the effect of foreing direct investment on real gross domestic product in Malaysia. Vector Error Correction model (VECM) is used to analyze the short run effect of the two variables in Malaysia. Granger causality is also employed to see the causal effect of foreing direct invesement and real grsoss domestic product. Our main findings reveal that the increase in foreign direct investment has given a good impact on Malaysian economic growth. Specifically, 1% permanent increase in the level of foreign direct investment causes the level of Malaysian gross domestic product to increase by 49.135%. By using granger causality, it is found that GDP has granger cause to FDI and vice versa.

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